What happens if HMRC decides I'm inside IR35?

An inside-IR35 finding means HMRC treats the engagement as employment for tax purposes, even though the work is done through a limited company.

What happens next depends on which set of rules applies. For engagements with smaller clients, Chapter 8 Part 2 ITEPA 2003 puts the liability on your personal service company. For engagements with medium or large clients, Chapter 10 Part 2 ITEPA 2003 shifts responsibility for deciding status, and often for paying PAYE and National Insurance, further up the chain.

Either way, the result is a backdated tax bill calculated as if the income had been salary, plus interest, and potentially a penalty depending on how the error arose.

Chapter 8 Part 2 ITEPA 2003 (opens in a new tab) is the original IR35 legislation. It applies where a worker provides services through an intermediary, typically their own limited company, to a small client, and requires the intermediary to calculate a deemed employment payment if the engagement would otherwise look like employment.

Chapter 10 Part 2 ITEPA 2003 introduced the off-payroll working rules for medium and large clients. Under these rules, the client must make a status determination and, where the engagement is inside, the fee-payer operates PAYE and National Insurance at source.

Off-payroll working also includes a set-off mechanism: where a personal service company has already paid Corporation Tax and dividend tax on the same income, that can reduce the further liability raised on the fee-payer, to avoid double taxation on the same income.

Status itself is decided using the established control, substitution, and mutuality of obligation tests developed through employment status case law, applied to the actual working arrangement.

If your company is found inside IR35 under Chapter 8, you personally, through the company, must account for the deemed employment payment and settle any shortfall.

If a client's status determination puts you inside IR35 under Chapter 10, check whether the fee-payer has already deducted PAYE and National Insurance from your invoices; if so, your company's own tax position needs adjusting to reflect income already taxed at source.

Keep contracts, working practice evidence, and any status determination statements together, since a wrong determination can be challenged through the client's disagreement process or directly with HMRC.

A backdated inside-IR35 finding typically means employer's and employee's National Insurance, income tax adjustments, and interest, calculated over however many years HMRC can reach.

There can also be a penalty if HMRC concludes the original status decision was careless or deliberate rather than a genuine reasonable-care error.

Defending a status enquiry needs early specialist input to gather the right working practice evidence. Growth plan clients have free tax investigation insurance included for this kind of enquiry — see /fees for what is covered.

Do not rely only on a contract's wording; HMRC and tribunals look at how the engagement actually worked in practice.

Do not assume a client's status determination is automatically correct; you can challenge it through the client-led status disagreement process.

Do not delay gathering evidence of independence, substitution, and control while the engagement is still live, since it is much harder to reconstruct after the event.